When someone passes away, one of the most common questions their family asks is: “Will their retirement accounts have to go through probate?”
The answer is usually no, but there are important exceptions.
Retirement accounts are often among a person’s most valuable assets. Understanding how they transfer after death can save loved ones time, money, and unnecessary stress.
Whether you have an IRA, 401(k), 403(b), pension, or another type of retirement account, it is important to understand how these assets fit into your overall estate plan.
Retirement Accounts Typically Pass by Beneficiary Designation
Unlike many other assets, retirement accounts generally do not pass according to your Last Will and Testament or Revocable Living Trust.
Instead, they typically pass according to the beneficiary designation on file with the financial institution or retirement plan administrator.
When you opened your retirement account, you may have named one or more primary beneficiaries and possibly contingent beneficiaries. After your death, the account is generally transferred or distributed according to those beneficiary instructions.
Because the account transfers through the beneficiary designation rather than through the probate estate, probate can often be avoided.
The IRS recognizes beneficiaries as the people or entities designated to receive retirement plan or IRA benefits after the account owner’s death.
This direct transfer is one reason retirement accounts can often be handled more efficiently than assets that must go through the probate process.
What If No Beneficiary Is Named?
Problems can arise when no valid beneficiary designation exists, the named beneficiary has already passed away, or no contingent beneficiary has been listed.
What happens next depends on the specific retirement plan or account agreement. The plan’s default beneficiary provisions may determine who receives the account. In some situations, the account may become payable to the deceased owner’s estate.
If the retirement account becomes part of the estate, it may then become a probate asset.
The Personal Representative or Executor may need to administer the asset through probate before the remaining estate can be distributed according to the will or applicable state law.
This can result in delays, additional expenses, and complications that may have been avoided by keeping beneficiary designations current.
If you are dealing with an estate after someone has passed away, Kelley Law Firm’s probate law services can help you understand what assets may need to go through probate and what steps come next.
Your Will Generally Does Not Override a Beneficiary Designation
Many people believe they can change who receives a retirement account simply by updating their will. Generally, that is not how retirement accounts work.
For example, suppose your will states that your assets should be divided equally among your three children, but your IRA still lists only one child as the beneficiary. In most situations, the IRA will pass according to the beneficiary designation rather than being divided according to the terms of the will.
This is why reviewing beneficiary designations is just as important as periodically updating your Last Will and Testament.
Your estate planning documents and beneficiary designations should work together rather than provide conflicting instructions.
What About a Spouse as Beneficiary?
Spouses often have special rights when it comes to retirement accounts, particularly employer-sponsored retirement plans.
The rules can differ depending on whether the account is an IRA, 401(k), pension, or another type of qualified retirement plan. Surviving spouses may also have options for handling inherited retirement assets that are not available to non-spouse beneficiaries.
For example, the IRS provides different inherited retirement account rules depending on whether the beneficiary is a surviving spouse, another eligible designated beneficiary, or a non-spouse beneficiary.
Because these choices can affect both taxes and future distributions, surviving spouses should consider obtaining legal and tax advice before moving or withdrawing inherited retirement funds.
What If You Have a Revocable Living Trust?
A Revocable Living Trust can be an important estate planning tool, but simply creating a trust does not automatically cause your retirement accounts to become part of that trust.
Some individuals intentionally name a trust as the beneficiary of certain retirement accounts. Others name individual beneficiaries directly.
There is no one-size-fits-all approach.
Naming a trust as the beneficiary may provide additional control over how inherited retirement assets are managed, particularly when planning for:
- Minor children
- Beneficiaries with special needs
- Beneficiaries who may need assistance managing money
- Families who want additional control over how assets are distributed
However, naming a trust as the beneficiary of a retirement account should be carefully coordinated with your estate plan and tax strategy.
IRS rules governing retirement accounts inherited through trusts and other beneficiaries can be complex, particularly when determining required distributions.
If a trust is part of your plan, Kelley Law Firm can help you evaluate how your trust and other estate planning documents should coordinate with your beneficiary designations.
Do Not Forget to Review Your Beneficiary Designations
Life changes, and your beneficiary designations should change with it.
Consider reviewing your retirement account beneficiaries after major life events such as:
- Marriage
- Divorce
- Birth or adoption of a child
- Death of a beneficiary
- Retirement
- Significant changes in your finances
- Creation or amendment of a trust
- Significant changes to your estate plan
It is also wise to confirm that you have both primary and contingent beneficiaries listed where appropriate.
Taking a few minutes to review these designations periodically can help prevent unintended results later.
What About Taxes on Inherited Retirement Accounts?
Although retirement accounts often avoid probate, that does not necessarily mean they avoid taxes.
Depending on the type of retirement account, the beneficiary’s relationship to the account owner, and how distributions are taken, inherited retirement assets may create income tax consequences.
For example, beneficiaries of traditional IRAs generally must include taxable distributions they receive in their gross income.
Federal law also contains specific rules governing when beneficiaries must withdraw money from inherited retirement accounts.
For many non-spouse beneficiaries, the SECURE Act’s rules can require an inherited account to be fully distributed within a specified period, commonly referred to as the 10-year rule, although exceptions apply to certain eligible designated beneficiaries.
You can review additional information directly from the IRS guidance on retirement account beneficiaries and the IRS guidance on inherited IRAs and distributions.
Because inherited retirement account rules can be complex, beneficiaries should consult qualified legal, financial, and tax professionals before making significant distribution or rollover decisions.
Retirement Accounts Are Only One Piece of Your Estate Plan
Many people assume that because their retirement accounts have beneficiaries, their estate planning is complete.
Unfortunately, beneficiary designations are only one part of a comprehensive estate plan.
Your plan may also need to address assets such as:
- Your home and other real estate
- Checking and savings accounts
- Investment accounts
- Business interests
- Vehicles
- Personal property
- Digital assets
- Life insurance
- Other assets without beneficiary or transfer-on-death designations
A comprehensive estate plan should also include documents designed to protect you during your lifetime.
For example, a Durable Power of Attorney can authorize someone you trust to manage financial matters if you become unable to act on your own behalf.
Your estate plan may also include wills, trusts, healthcare planning documents, and other tools depending on your family, assets, and goals.
You can explore Kelley Law Firm’s complete estate planning and legal services to learn more about how these pieces work together.
The Bottom Line
In most cases, retirement accounts do not go through probate when there is a valid beneficiary designation because the account can pass directly according to the beneficiary instructions.
However, problems may arise when:
- No beneficiary is named
- A beneficiary has already passed away
- Contingent beneficiaries were not designated
- The account’s default provisions direct the asset to the estate
- Beneficiary designations conflict with the account owner’s broader estate planning goals
- A trust is named as beneficiary without proper planning
Reviewing beneficiary designations regularly and coordinating them with your overall estate plan is one of the simplest ways to help protect your loved ones and ensure your assets pass as intended.
Let Kelley Law Firm Help Coordinate Your Estate Plan
At Kelley Law Firm, we help individuals and families throughout Kansas and Missouri create estate plans that work together as a complete strategy.
That can include reviewing beneficiary designations, preparing wills and trusts, establishing powers of attorney, addressing probate concerns, and developing a customized plan based on your goals and family circumstances.
If you are unsure whether your retirement accounts are properly coordinated with your estate plan, now is a good time to review them.
Explore our estate planning services or our complete Practice Areas to learn how Kelley Law Firm can help.
Ready to make sure your retirement accounts and estate plan work together? Contact Kelley Law Firm today to schedule an estate planning consultation and take the next step toward protecting your family, your assets, and your wishes.